Definition of eligible retirement benefit plan and application of Pennsylvania personal income tax: December 19, 2003.

On December 19, 2003, Tax Executives Institute filed comments with the Pennsylvania Department of Revenue on Personal Income Tax Bulletins 2003-1 through 2003-5. The comments were prepared under the aegis of TEIs State and Local Tax Committee, whose chair is Baraba Barton of Electronic Data Systems Corp.

Tax Executives Institute has reviewed Personal Income Tax Bulletins 2003-1 through 2003-5 (Discussion Drafts Revised 10/03/2003) (Draft Bulletins) and respectfully submits the following comments. We appreciate the Department of Revenue's making the Draft Bulletins available for comment. In sum, TEI believes the proposed definition of "Eligible Retirement Benefit Plan" is problematic and the proposed application of Pennsylvania's constructive receipt rules in respect of nonqualified deferred compensation plans is misguided.

Tax Executives Institute

Tax Executives Institute (TEI) was established in 1944 to serve the professional needs of business tax professionals. Today, the Institute has 53 chapters in the United States, Canada, and Europe, including our Harrisburg, Philadelphia, and Pittsburgh chapters in Pennsylvania. Our more than 5,400 members are accountants, attorneys, and other business professionals who work for 2,800 of the leading companies in North America and Europe. As a professional organization, the Institute is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the costs and burdens of administration and compliance to the benefit of taxpayers and government alike. The Institute is committed to maintaining a system that works--one that builds upon the principle of voluntary compliance, one that taxpayers can comply with, and one in which the state taxing authorities can effectively administer the tax laws without unduly burdening taxpayers.

Definition of Eligible Retirement Benefit Plan

TEI believes the definition of Eligible Retirement Benefit Plan should follow the pattern of the Internal Revenue Code (IRC) and the Employee Retirement Income Security Act of 1974 (ERISA) and hence treat plans that are retirement plans under those statutes as retirement plans for Pennsylvania Personal Income Tax (PIT) purposes.

The proposed nine-factor test in Section F, Part IV, of Draft Bulletin 2003-4 effectively excludes many defined contribution plans and all unfunded retirement plans from the definition of Eligible Retirement Benefit Plan. Regrettably, this approach is contrary to the approach taken in the federal IRC and ERISA. Rather than exclude certain types of plans from the definition, the Department should include plans that are commonly recognized as retirement plans, and focus on the timing and circumstances of payouts to determine whether distributions from particular plans are taxable under the PIT. The nine-factor test would tender ineligible some plans with fairly common features that would otherwise be qualified plans for federal purposes. Harmonizing Pennsylvania's rules with the abundant federal authority in this area will hot only facilitate administration and compliance for employers, but also employees, plan administrators, and the Department.

Many defined contribution plans accord the participant an election to take distributions in the form of employer securities, and many employers with both defined contribution and defined benefit plans allow a distribution from the defined benefit plan to be rolled over into the employer's defined contribution plan. As currently drafted, distributions from a defined contribution plan with an employer security distribution option would not be treated as received from an Eligible Retirement Benefit Plan. Accordingly, they would be subject to current tax. This treatment would even apply to distributions of amounts attributable to benefits accrued under a defined benefit plan and rolled over into a defined contribution plan (which are treated as tax-deferred for federal purposes). The variant treatment likely engenders significant administrative burdens, added reporting complexity, and increased recordkeeping burdens not only for employers, but also for plan administrators and fiduciaries. Penalizing...